Pressure to invest is helping investors to overlook Berlin’s politics

There’s no stopping Berlin. Scarcely has the city announced new political measures designed to make investment in Berlin property even more restrictive, than international investors vote Berlin to be the most attractive property market in Europe.

The annual study of European markets carried out by consultants PwC and the Urban Land Institute has just seen Berlin displace last year’s incumbent Munich from the top of the list, relegating the Bavarian capital to 11th place thanks to excessively high prices. Berlin jumps to the top, ahead of Dublin, Madrid, Hamburg and Athens in the Pwc/ULI Emerging Trends 2015 list.

Berlin has its attractions. Its future looks bright, its economic fundamentals are improving, and it’s cheap by the standards of other European cities – despite a rise in apartment prices of 13.8% last year, according to ImmobilienScout24. That’s after rising 15.1% and 16.9% in 2013 and 2012 respectively, along with corresponding rent increases of 5.4% last year and 8% annually before that.

While investors are determined to drive Berlin’s prices up to a par with other German and European cities, the forces of resistance to higher rent levels and further gentrification are also gathering strength. Legislation to cap rents is well advanced, as is a change in the law as to how brokers are recompensed for their services, both of which are designed to protect tenants from the ravages of the marketplace and ensure that the red teeth and claws of capitalism are held safely at bay outside the front door.

Now the so-called Milieuschutzgebiet regulation, a local ordnance designed to ensure that the character of a Berlin neighbourhood remains unthreatened by encroaching gentrification, is spreading its tentacles out beyond the central districts of Mitte, Friedrichshain-Kreuzberg, Prenzlauer Berg, and Pankow, to allegedly protect tenants from greedy landlords.

Even within these desirable living areas, more and more neighbourhoods are falling into the clutches of local politicians, intent on currying voters’ favour. In their sights is the key issue of the status of a building, whether it is designated as a ‘rental’ property or whether its units may be ‘privatised’, or sold as condominiums.

A decree by Berlin’s senate is about to enshrine a host of new restrictions on landlords into concrete law. The lawyers are licking their chops at the potential to file charges on behalf of the state, or maligned landlords, or both. Investors, be warned.

Because yet again, excessive meddling is certain to awaken the ghosts of unintended consequences. As if smaller landlords weren’t being faced with enough restrictions with the impending rental freeze, or Mietpreisbremse, they are now being effectively prevented from making improvements to their properties, such as adding an extra bathroom, extending the balcony or even polishing up the building’s façade.

About 10% of Berlin’s apartments now fall into the category of Milieuschutzgebiet, covering about 300,000 people across 21 designated areas in the city, but the number is rising fast. Much faster, in fact, than the number of Berlin apartments whose status managed the change from ‘rental’ to ‘condominium’, with that number doubling over the last four years in a bid to stay ahead of the politicos. In 2013 nearly 10,000 Berlin apartments were granted this status – with the corresponding ability to charge an adequate rent for a much improved dwelling. The new laws are designed to drastically limit this figure.

At the heart of these changes is the still-prevalent belief among handout-hardened politicians that Berlin is a city of renters, and that housing has traditionally been protected, if not outright subsidised. The real estate industry counters with the argument, the new restrictions are robbing willing tenants of the right to buy their own apartment and thus to build some even modest wealth for their own retirement.

At most the new laws might protect 10% of tenants living in such protected housing, goes the landlords’ argument. Hardened privatisers, such as Jürgen Kelber of Dr. Lübke & Kelber, or Jacopo Mingazzini of Berlin’s Accentro Real Estate, part of the listed Estavis group, point out that, at from €1,500 per sqm, property in older buildings is half as cheap to buy as in newly-built housing.

So preventing tenants from buying properties where they have spent years and want to remain, simply narrows supply and drives the price of the property up, currently by at least 10% a year, according to local observers. This all plays further into the hands of the big professional landlords, rather than the much more typical small landlord, whom experience shows has been much more modest in driving through legally permissible rent and ancillary charges than the ‘faceless’ corporation.

While the mega-mergers such as Deutsche Annington’s takeover of Gagfah, and Deutsche Wohnen’s swallowing of GSW Immobilien grab the headlines, the thousands of smaller landlords whose motivations are more geared to providing a decent yield and an adequate pension are being thwarted by ‘well-meaning’ politicians at every turn. It is a credit to Berlin’s popularity that investors are still flocking to put their money down, without really understanding what the politicians have in store for them.